Market Ecosystem: Spicejet Airlines Outlook, Opportunities And Challenges

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The Indian aviation industry has been under turbulence in recent past. The last few years have been without doubt some of the most challenging in India’s aviation history. Indian aviation industry is facing threats like over capacity , cut throat competition , high operating costs and inflexible regulatory policy. With the ongoing growth in the Indian economy, the aviation market is expected to be the third largest by 2030. It is observed that aviation is still a dream for more than 95% of population and there is a huge untapped potential. Global challenges and its impact on Indian aviation industry should be understood in depth for a sustained growth. The below article is an attempt to discuss the Indian aviation sector with a special emphasis on LCC (Low Cost Carriers) to make air travel affordable to the masses.

UDEY DESH KA AAM NAGRIK – DREAM OF HOURNABLE PRIME MIINISTER: NARENDRA MODI

Global Airline Industry and ecosystem

From the discovery of flights in early 19th century, air travel has been gaining importance and has brought a revolution in the way people travel. The airline industry has become indispensable now and provides employment opportunities to a section of society. Revenues for the global airline industry in 2017 was $754b, of which ~70% was from passenger travel and the rest from cargo transport, showing a CAGR of 2.8% over the last 10 years.

In 2017, the airline industry made profits of $38b worldwide, and has been maintaining a steady profit per passenger during the last 3 years. The number of passengers nearly doubled from 2.6b in 2010 to >4b by the end of 2017.

While passenger traffic has decreased in North America and Middle East, it has plateaued in Asia Pacific and LATAM, and increasing in Africa.

The brief challenges that the global aviation industry faces are outlined below in no order of significance

Safety: Today, chances of a jet aircraft being involved in a major accident is one in 2.4 million. While passenger safety has improved over time, there are other dimensions that need attention.

Aircraft tracking: MH 17 brought to light the need for better information for operations over conflict zones, and vendors and governments.-

Profitability and fuel prices: Over the last century airlines have just broken even. On average, airlines make less than $6 per passenger. On about $750 billion in revenue, it is just a 2.4% profit margin that results. Rising fuel cost directly contribute to declining passenger load factor and impact margins and fares.

Economy: Airlines fly to different parts of the world and an economic imbalance in one zone will affect the stability of the industry

Technology: 60% of Global airline CEOs are developing future strategies or have concrete plans for technology changes

Global Conflict: Growing protectionism and trade tensions.

Emissions: Fuel efficiency gains of 20-30% over their predecessors, by 2050 the aspiration is to cut net emissions back to half the levels that were emitted in 2005. Development of sustainable biofuels is looked as an alternate option to curb emissions.

Infrastructure: Estimates are that there is about 12% efficiency that could be gained if air traffic control systems worked at their optimum level.

Indian Airline Industry and ecosystem

India has become 9th largest civil aviation market in the world. In FY18, domestic passenger traffic witnessed a growth rate of 18.3 per cent. In FY18, Indian airports witnessed a domestic passenger traffic of about 243.28 million people. Investments worth US$ 6 billion are expected in the country's airport sector in 5 years, a major step to become World Leader. The domestic passenger load factor has gone beyond 90% in February 2018. This was an all-time high for the seven domestic markets that are tracked monthly and follows a sustained period of rapid growth in air passenger demand in the country.

The domestic India also posted the fastest Revenue Passenger Kilometer growth for the third calendar year in a row in 2017 (17.5%). Such accelerating growth has seen overtook the market of Japan, Brazil, Australia, and Russia in terms of RPKs flown in recent years.

List of Airlines in India- April 2018

Airline IATA Code Commenced Headquarters Type

Air India AI 1932 Delhi Flag Carrier

Jet Airways 9W 1993 Mumbai Full Service

Alliance Air 9I 1996 Delhi Regional

Air India Express IX 2005 Kochi Low Cost

SpiceJet SG 2005 Gurgaon Low Cost

GoAir G8 2005 Mumbai Low Cost

IndiGo 6E 2006 Gurgaon Low Cost

Air Odisha 6X 2012 Bhubaneswar Regional

Zoom Air ZO 2013 Gurgaon Regional

AirAsia India I5 2014 Bengaluru Low Cost

Vistara UK 2015 Gurgaon Full Service

TruJet 2T 2015 Hyderabad Regional

Air Deccan DN 2017 Mumbai Regional

Luwang Air — 2018 Kolkata Regional

Largest Indian Airlines Market Share from 2013 Market Share in April 2018

Every industry needs a proper pricing strategy to breakthrough existing competition. Pricing strategy will become paramount if the competition also includes a flag carrier. In a country like India where 85% of population (900 million) uses railways as their preferred choice of travel, LCC are the answer to Indian economic conditions. Many more factors play an important role specially Political, Economic, Social, and Technology.

Political

FDI: 49% in airlines and 100 % in airports

Freedom to determine fares

Up gradation of airport infrastructure

Economic

Increase in salaried class income from 14% to 16%

GDP 8%-9% for past 5 years

Oligopoly structure of market

Pricing strategy is firm specific

Social

Increase in travelling lifestyle & air travel a necessity

Increasing business travel

LCC as mass transport medium

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Growing middle class

Technology

IT revolution & online ticketing

Best price shopping service

Capital intensive technology

SpiceJet Airlines

SpiceJet was established as Modiluft in the year 1994 as an air-taxi provider. The airline was acquired by Ajay Singh in the year 2004 and was renamed SpiceJet. There was a sudden surge in entry into low cost airline. Spicejet started its operations as low-cost airline frim May 18th 2005.

SpiceJet has truly become India’s favorite airline and has made flying affordable and economical for many Indians. SpiceJet is currently operating an average of 405 daily flights to 51 destinations, including 44 domestic and 7 international ones. The airline connects its network with a fleet of 37 Boeing 737NG and 22 Bombardier Q-400s. Most of the airline fleet in Spicejet is offering SpiceMax, which is the most spacious economy class seating option in India.

Operation Snapshot

SpiceJet, in June 2018 celebrated 13 years of an incredible journey. From scripting one of the biggest aviation turnarounds to three successive profitable years, record aircraft orders, industry’s highest load factor, high on-time performance, the airline has indeed come a long way and emerged as the country’s largest regional operator.

SpiceJet Clocks 3rd Successive Profitable Year and 13th Consecutive Profitable Quarter Reports highest-ever annual profit in its history

The airline’s record of profitable growth comes on the back of its continued focus on nurturing a healthy growth rate in its passenger traffic by adding capacitates on its existing routes while identifying new destinations with pent-up demand across the country.

Every company has to learn from its experience to stay in competitive environment

SpiceJet was at the verge of closure in 2014. There was a survival issue , it was not even able to pay salary or the government dues. This is the time when Ajay Singh took over the leadership and drafted a recovery plan. Luckily the same was approved by the Ministry of Aviation and it helped Spice Jet to come up. The government had a vital role in bringing SpiceJet back to life. The airline had suffered so much due to lack of trust from its stakeholders. The key highlight of the recovery mechanism was bringing the normal operation back to work. This included right time flight takeoff, proper customer address at the counters etc.

Spice jet identified low occupancy destinations and stopped operations at those destinations.They also came up with some measures to benefit the customers during holidays.Also holidays , festivals were excluded from sales offers.All these measures helped spice jet back to the revival path and ultimately becoming best by 2017.

The below data is a testimony of their hard work and policy making:

For the year ending March 2018

Profits grow by 32%, Revenue by 26%

Revenue per Seat Kilometer (Passenger yield) increased to 9 %

Registers record domestic load factor of 94.7 % in FY 18

Key Highlights

Industry’s highest load factor for 3 years in a row; over 90% load factor for 35 successive months

Bags 20 routes in UDAN Round II

Launches operations to five destinations under UDAN

% passenger growth & passengers in million (Domestic)

% passenger growth & passengers in million (International)

Key Takeaways

SpiceJet story shows that right strategic moves with positive attitude can rapidly transform an organization. The share price of Spicejet had dropped to INR 18 per share in 2014 and it is now around INR 120. In June 2018, Bloomberg mentioned Spicejet as world’s best aviation stock for this year with a 124% gain. SpiceJet is currently valued at INR 7,400 crore compared to INR 650 crore it was valued at during its darkest hours in 2014. Rival airline - Jet Airways which has a fleet size double of SpiceJet, is currently valued at INR 6,200 crore. In early 2018, Spicejet has placed order for 100 fuel-efficient Boeing Max aircraft, which is in addition to their previous order of 55 aircrafts. These orders will be delivered in over the 8-10 years and is expected to bring down the operational costs by 5-10%.

Future of Indian Aviation Industry

Passenger traffic is expected to increase to 421 million by 2020 from 308 million in 2017-18.

Contribution of travel and tourism to India’s GDP is expected to increase from US$ 234.04 billion in 2017 to US$ 251.64 billion in 2018. The contribution is further forecasted to increase to US$ 492.21 billion by 2028F.

Business and leisure travel to boost growth. Spending on business travel is estimated to increase to US$ 24.41 billion in 2028F from an estimated US$ 12.38 billion in 2018, while on leisure travel is forecasted to rise to US$ 432.35 billion in 2028 from estimated US$ 216.94 billion in 2018.

SpiceJet strategy to sustain the momentum

Maximize and Optimize revenue

❖ Strengthen presence in profitable and key sectors

❖ Expand international operations

❖ Maximize asset utilization and dynamic fleet planning to address seasonal variation and demand profile

❖ Leverage Q400 fleet to deploy in regional market

❖ Route optimization to reduce unproductive flight time

Attain industry lowest cost of operation

❖ Ensure efficient utilization of fuel

❖ Resort to fuel import and hedging to reduce impact of price fluctuations

❖ Effective re negotiations of unfavorable contracts

❖ Developing dedicated cross functional task force

❖ Maximize in house operations

Consolidating operations and strengthening finance

❖ Enhance value based offerings

❖ Integrate travel related services

❖ Focus on developing cargo and merchandise business

Developing new source of revenues

❖ Invest in automation and new technology of operational efficiency and customer experience

❖ Succession planning from academy and skill up gradation

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